(AZO) U.S. Retail Sales Flat in August

Retail and food service sales were unchanged in August, below expectations of a 0.2% increase. July was revised down from an increase of 0.5% to an increase of 0.3%. Total retail sales are up 7.2% from a year ago.

This was a disappointing report, and shows the consumer is still quite cautious. This year, “back to school” did not mean “back to the mall.” The Retail Sales report covers far more than just the malls, however, and is a very broad-based measure of consumer spending.

Since consumer spending makes up 70% of the economy, it is a very important number. That overstates things a bit since retail sales are mostly about the sale of goods, not services, and services make up two thirds of what consumers spend. Still, it is a pretty important thing to watch.

Beneath the Headline Numbers

Auto (and parts) sales were down 0.3%, down from a 0.2% gain in July (revised down from a 0.7% increase). On a year-over-year basis they were up a solid 6.4%. That figure includes sales at parts dealers like AutoZone (AZO) as well as the dealers like CarMax (KMX).

Excluding autos, retail sales were up 0.1%, below expectations for a 0.3% increase. Year over year, sales are up 7.3%. The year-over-year numbers are pretty robust, but keep in mind that these numbers are not adjusted for price changes, so part of the year-over-year gains simply reflect inflation. However, outside of food and energy, inflation is very tame, on a year-over-year basis.

Of the thirteen types of stores tracked in the report, eight were up on a month-to-month basis, with five down. The sales weakness was concentrated in many of the more discretionary types of retail sales. Last month, nine were up and four down on the month.

A Look at Stores of All Types

Year over year, all types of stores are showing increases, ranging from 0.2% (Furniture stores) to 20.8% for gas stations. Clearly, gas prices were the major factor in the increased sales at the corner Exxon (XOM) station, not a sudden rise in the number of 44oz. fountain drinks being consumed. Actually, the evidence suggests that the volume of gasoline sold is actually declining slightly in response to higher prices, and moves to increase the fuel efficiency of the country’s auto fleet.

Aside from the gas stations, which are clearly a special case, the next strongest group on a year-over-year basis was the non-store retailers, the group that includes the catalog and Internet retailers like Amazon (AMZN). They are up 10.4% year over year. Since sales taxes are generally not paid on internet or catalog sales, the relative strength in non-store retailers is one of the factors that is putting strains on state and local government revenues. As noted above, the auto dealers and parts stores were up 7.3% year over year.

The best performers on the month were the sporting goods and hobby stores, where sales rebounded 2.4%, reversing a 1.1% slide in July. This was the one discretionary type of store to show strength. Year-over-year sales at places like Dick’s Sporting Goods (DKS) are up 7.1%.

The next best category of retailers for the month were the non-store retailers, up 0.5% on top of a 0.3% rise in July. That was matched by the Electronics and Appliance stores, which also gained 0.5% on top of a 1.2% gain in July. However, year over year this was one of the weakest groups, with just a 1.5% gain.

The retail sales figures are adjusted for seasonal factors, such as the number of selling days in the month, but they are not adjusted for inflation. Electronics is one area that perpetually sees falling prices. This rebound is probably temporary, reflecting the weakness earlier this year.

The weakest area was the miscellaneous retailers, which by their very nature are hard to categorize, or fit into any larger economic trends. There sales dropped a sharp 2.2%, reversing most of last month’s 2.4% gain. Year-over-year, though, sales are up a solid 7.1%. Clothing stores like The Gap (GPS) were weak, with a drop of 0.7% on top of a 0.3% decline in July.

“Back to School” a Bust

It looks like the “back to school” season, the second-most important part of the year for those retailers, was a bust. Relative to a year ago they are up 5.6%, which is a bit below average. A new pair of jeans is a bit less discretionary than a new kitchen table, but less discretionary than going to the grocery store.

General merchandise stores, a category that includes the department stores, saw a 0.1% increase after rising 0.4% in July. Year over year, general merchandise sales are up 3.8%, so sales are generally on the soft side at the mall anchors than in the stores in the periphery of the mall.

Going out to eat and drink is also a very discretionary item, and sales at bars and restaurants were down 0.3% in August, on top of a 0.4% decline in July. Year over year, sales are up just 3.9%. The two most non discretionary areas showed small increases.

Food and beverage stores (including grocery stores) posted a 0.2% increase for the month, on top of a 0.5% rise in July, and are up 6.4% year over year. Some of that increase is due to higher food costs. Health care stores — mostly drug stores like Walgreen’s (WAG) — saw a 0.2% increase in August on top of a 0.5% increase in July, but are up just 3.5% year over year.

Weak Report, Below Expectations

Overall, I have to call this a weak report. It was well below expectations, and the more discretionary types of stores, such as furniture and clothing, were among the weak areas. That indicates that consumers are very cautious.

These are August numbers, and thus probably reflect the concerns over the debt-ceiling showdown, and the subsequent weakness in the stock market. Since the top 20% of the population gets more than 50% of the total income in the country, and they are the ones who are likely to have money in the stock market, the market gyrations may have caused them to decide to just sit on their wallets.

Keep in mind that these numbers are not adjusted for inflation, but inflation is low and likely to remain low. The bond market is crystal clear on its view that inflation will remain low. Bond market investors, who tend to be pretty sophisticated types, are willing to lock up their money for ten years at a yield of less than 2.0%. They would have to be blithering idiots to do that if they expected inflation to seriously start to accelerate. If inflation were to average more than 2.0% for the next decade those bonds would be certificates of confiscation, not investments.

The graph below (from this source) shows the longer-term path of retail sales, both total (blue line) and excluding sales at gas stations (red line). In both cases we are at new highs, but recall that these numbers are not adjusted for inflation. While inflation — particularly core inflation — is still very low, over the course of a few years it still plays a significant role.

The pace of growth since the bottom (slope of the lines) appears to be slightly better than what prevailed prior to the Great Recession, but it was not a very fast snap-back, more like a reset to a lower level, than a continuation of the previous growth rate from a lower level. The ex-gasoline numbers are probably a better reflection of the overall state of the economy than the total numbers, but both are telling a pretty similar story.

Things are getting better, but slowly. While this report is weak, it was not a disaster. However, if the September report is also flat or down, we will have a real reason to worry.

The second graph (from this source) shows the year-over-year change in sales excluding gasoline, going back to 1993. While the year-over-year gain of 5.7% is down from the 8.2% pace at the start of the year, it is still very healthy, and is higher than the increases that we were running for most of the previous economic expansion — about on par with how we were doing for most of the Clinton economic expansion.

Core inflation was much lower than now in both of those previous expansions (these numbers strip out only the energy side, not the food side of the ex-food and energy inflation, so it is not a perfect match). That suggests that real retail sales outside of gasoline are healthy, at least on a year-over-year basis. Then again we are coming off the biggest downturn in spending in decades. That means there is a lot of pent up demand out there.

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